Does BNPL cause debt? Responses from: a debt charity, providers, and a bank

StepChange partnered with Barclays to urge the government to proceed at pace with regulating Buy Now Pay Later (BNPL) in much the same way as other consumer credit to protect consumers more adequately.

This comes from the cost of living crisis; 91% of adults in Great Britain reported an increase in their cost of living between June and July 2022.

Outcome of research 

The outcome of their joint research revealed that

  • BNPL, when used responsibly, can be an excellent tool for buying something and spreading out the cost over a more extended period to manage finances better.
  • However, one in three consumers who have used unregulated BNPL says the lending has got them into unmanageable debt. 
  • Over a third of shoppers also say BNPL has become more appealing due to the current cost-of-living crisis, with users now paying off 4.8 of purchases using BNPL on average – up from 2.6 in February this year.
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Speaking to Antony Stephen, CEO of Barclays Partner Finance, about the research, he commented, “At Barclays, we strongly believe that sector regulation will play a critical role in helping to ensure that BNPL products are benefitting consumers and not harming them. More specifically, we believe BNPL providers must undertake appropriate affordability assessments, and all lending must be reported to the credit reference agencies at the point of purchase.”

Sue Anderson, Head of Media at StepChange, commented, “It’s easy to recognize the convenience and appeal of BNPL services for consumers, but as it stands, BNPL is an unregulated form of credit, which poses several risks to its users. It’s not subject to the same affordability checks and stringent rules on marketing as other forms of credit, which serve to protect consumers from experiencing financial harm.”


The BNPL backlash 

In speaking with Klarna and ClearPay, two BNPL giants, it is clear that both companies disagree with this research and assessment. 

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A Klarna spokesperson commented. “It is mind-boggling and frankly irresponsible, in a cost of living crisis, that Barclays should use StepChange to endorse their high-cost installment credit product, which charges 10.9% interest, to lobby against interest-free and manageable BNPL products, which HM Treasury just this week concluded are ‘inherently lower risk than interest-bearing credit products.'”

They also point out: 

  • Debt is far lower on BNPL than on credit cards: For credit cards and overdrafts, Bain found that 43% of people have balances on their credit card above £300 ($247), compared with only 18% of BNPL users (Bain)
  • The biggest reason BNPL users are in debt is actually for borrowing on credit cards (49%), followed by taking out payday loans (30%) (Omnibus survey sample 2,000+ UK adults)
    • And 93% of UK consumers see Klarna as a better option than a credit card (UK Consumer Survey – Q3 sample 33,000+ UK adults) 
    • Similarly, Bain found that only 8% of BNPL users prefer traditional forms of credit to BNPL (Bain)

It should also be noted that Klarna does not charge late fees, so they restrict the use of services, so users don’t accumulate debt, and they provide a repayment plan to keep people on track. 

The vast majority of Klarna’s customers pay on time and in full, as emphasized by our low loss rates at <1%, which are 30-40% below industry standards and traditional credit cards, which suggests to us that consumers use our products to manage their finances and add flexibility to their spending – without interest or fees,” Klarna adds. 

“The conclusions in this report from Barclays are hugely patronizing to UK Retailers who already choose their credit providers based on their responsible lending practices and quality of service. With consumers rating Klarna ‘Excellent’ on Trustpilot (4.4 stars out of 5 from over 150,000 reviews), compared to Barclays, which scrapes just 1.5 stars out of 5, it’s unsurprising that UK Retailers, like their customers, are ditching the old banks.”

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Like Klarna, Clearpay is not a loan or a credit product, meaning there is no revolving debt charged to the consumer. The platform was built from the ground up as a budgeting tool.

They also don’t charge interest and note that 95% of transactions never incur a late fee. And if the consumer misses just one payment, they cannot use the service until full repayment is made.

In addition, ClearPay, like Klarna, noted that approximately 90% of its customer base uses debit cards when purchasing to avoid the cyclical revolving debt from credit and loans. According to Clearpay, users saved up to £28 million ($33 million) in credit card fees in 2021.

The need for regulation

It is, however, important to note that both sides agree on the need for regulation, but their strategies, how, and implementation differ. 

The government confirmed that lenders would be required to perform affordability checks before offering BNPL products and amend financial promotion rules to ensure they are fair, transparent, and safe. Borrowers will have the option of filing complaints with the Financial Ombudsman Service (FOS).

Barclay’s viewpoint is that regulators and lenders must work together to ensure minimum standards exist across the sector to protect consumers better.

They also argue that retailers play an essential role and that their report shows that 75% of those intending to use BNPL for the first time this year say that the retailer at the point of sale will influence their decision. They have calculated that retailer backing for fully regulated BNPL products could prevent up to 876,000 Brits from getting into unmanageable debt this year.

Anderson added, “we already know that use of BNPL has significant crossover with financial difficulty – our research suggests that around a quarter of BNPL users have to borrow just to keep up with their essential costs. That’s why it’s vital to bring regulation of this sector into line with other forms of consumer credit as soon as possible.”

Clearpay added, “We support the government’s intention to provide BNPL consumers access to the Financial Ombudsman Service. Until the arrival of BNPL products like Clearpay, the credit card industry, which profits from revolving debt cycles, went unchallenged. We look forward to working with HM Treasury and the FCA to deliver regulations that will protect consumers, provide innovation in consumer credit, and help move the UK from relying on revolving debt.”

“As a licensed European bank with many years of experience providing regulated credit products in the UK, we welcome HM Treasury’s BNPL regulation announcement as it will raise standards and consumer protections across the sector. We urge the government to move quicker than planned to implement regulation that gives additional protections to consumers from both irresponsible, unregulated BNPL providers and traditional banks disguising high-interest products as ‘BNPL,’ Klarna explained. You can read their full view of the latest announcements here

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Barclays’ product

Barclays plans to release the ‘Barclays Partner Finance (BPF), which has been providing regulated and affordable point-of-sale finance products and services for decades and remains an inspiring space for their business.

They are actively expanding the offering by partnering with some of the UK’s biggest retailers while focusing on delivering the best possible shopping experience for millions of customers. BPF offers interest-bearing personal loans with competitive APRs, interest-free loans over a range of lending periods (e.g., they have been offering interest-free financing on iPhones with Apple since 2019), and BNPL-type loans that can be payment-free for up to 12 months. Over 90% of Barclays Partner Finance lending is interest-free.

Klarna points out that Stepchange may wish to market the Barclays Partner Finance product. “The research StepChange worked with Barclays, commissioned to promote the Barclays Partner Finance product.

To summarise, although BNPL does not directly contribute to debt, StepChange and Barclays contend it contributes. Looking at their StepChange Debt Charity response to HM Treasury consultation on Regulation of Buy-Now Pay-Later, they state, “While we do not have evidence to state that BNPL is causing significant financial difficulty, it is clear from our evidence that BNPL products are used by people in, or at risk of, financial hardship. BNPL must therefore operate in a way that protects these consumers against it. 

  • Helen Femi Williams

    Helen Femi Williams is a freelance journalist and podcaster interested in fintech, politics, economics, and their intersections. She is the host of the letsgetlitical podcast, a fortnightly show interviewing guests from all different sides of the political spectrum, in partnership with the Mozilla Foundation. Prior to this role, she worked as an innovation consultant developing insurtech and fintech products and ideas for brands, startups, and major corporations. She studied International Relations at the University of Nottingham (UK and Malaysia).